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On January 17, 2014, the Department of Finance released proposed amendments to the Excise Tax Act to clarify that input tax credits (ITCs) cannot be claimed for an amount that was already refunded, credited, or rebated by a supplier. The legislative proposals respond to a recent Tax Court of Canada decision, Quinco Financial Inc. v. The Queen, which confirmed a legislative gap in the Excise Tax Act debit/credit note rules. Essentially, this gap allowed Quinco to obtain a tax windfall of over $2 million in ITCs, despite the fact that Quinco's predecessor corporation, the Brick Warehouse Corporation (the Brick), issued debit notes or received credit notes for those amounts.

The Quinco Case

In Quinco, the Brick deferred claiming ITCs on the property and supplies it purchased until a later date as an income tax deferral technique. During the deferral period, the Brick issued debit notes or was provided with credit notes by various suppliers, reducing the original price payable on the supplies. The Brick initially only claimed ITCs for the net GST amounts payable after the debit or credit note reductions. Later, on the recommendation of its external tax advisors, the Brick claimed additional ITCs for the amounts of GST originally payable but later reduced by the debit or credit notes. The Brick's external tax advisors had concluded that the Brick was statutorily entitled to claim ITCs for the full GST amounts listed in the original invoices.

The Canada Revenue Agency refused Quinco's claim, but Quinco successfully appealed to the Tax Court of Canada. The Court agreed that under the Excise Tax Act, the Brick's entitlement to ITCs crystalized at the time the original invoices were issued. While the Court acknowledged that this resulted in a windfall tax benefit for Quinco, it emphasized that the principles of statutory interpretation required the Court to respect the clear and unambiguous language of the statute.

The Minister of National Revenue appealed Quinco, but the Federal Court of Appeal has not yet rendered its judgment. The release of the legislative proposals before a final judgment demonstrates the intention of the Department of Finance to address the identified legislative gap and effectively eliminate the ability of taxpayers to obtain a similar tax windfall as soon as possible.

The Legislative Proposals

The draft GST/HST legislation is the result of the Department of Finance canvassing the Excise Tax Act so as to close any legislative gaps that might allow ITC claims for amounts that were already refunded, credited or rebated. Along with the obvious proposed amendment to eliminate the gap in the debit/credit note rules that benefited Quinco, the legislative proposals would clarify that all ITC claims, including claims for GST/HST amounts paid by charities and non-residents, are restricted to the net amount of GST/HST actually paid. The majority of the proposed amendments, upon becoming law, would be deemed to come into force retroactively.